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U.S. GDP falls nearly 5 per cent as coronavirus hammers economy, with worst yet to come – The Globe and Mail

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People wear face masks waiting outside a check-cashing facility in Detroit on April 25, 2020.

Shannon Stapleton/Reuters

The U.S. economy contracted in the first quarter at its sharpest pace since the Great Recession as stringent measures to slow the spread of the novel coronavirus almost shut down the country, ending the longest expansion in U.S. history.

The drop in gross domestic product, or GDP, reported by the U.S. Commerce Department on Wednesday reflected a plunge in economic activity in the last two weeks of March, which saw millions of Americans seeking unemployment benefits. The rapid decline in GDP reinforced analysts’ predictions that the economy was already in a deep recession and left economists bracing for a record slump in output in the second quarter.

“If the economy fell this hard in the first quarter, with less than a month of pandemic lockdown for most states, don’t ask how far it will crater in the second quarter because it is going to be a complete disaster,” said Chris Rupkey, chief economist at MUFG in New York.

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GDP declined at a 4.8-per-cent annualized rate last quarter, weighed down by a collapse in spending on health care as dentists’ offices closed and hospitals delayed elective surgeries and non-emergency visits to focus on patients suffering from COVID-19, the potentially lethal respiratory illness caused by the virus.

That was the steepest pace of contraction in GDP since the fourth quarter of 2008. Households also drastically cut back on purchases of motor vehicles, furniture, clothing and footwear. Receipts for transportation, hotel accommodation and restaurant services also plunged.

Businesses further tightened their purse strings and liquidated inventory, helping to overshadow positive news from a shrinking import bill, the housing market and more spending by the government. Economists polled by Reuters had forecast GDP falling at a 4-per-cent rate last quarter. The economy, which grew at a 2.1-per-cent rate in the fourth quarter, was in its 11th year of expansion, the longest on record.

The Commerce Department’s Bureau of Economic Analysis (BEA) said while it could not quantify the full effects of the pandemic, COVID-19 had partly contributed to the decline in GDP in the first quarter. The BEA said “stay-at-home” orders in March had “led to rapid changes in demand, as businesses and schools switched to remote work or cancelled operations, and consumers cancelled, restricted or redirected their spending.”

Many factories and non-essential businesses such as restaurants and other social venues were shuttered or operated below capacity amid nationwide lockdowns to control the spread of COVID-19. The sharp contraction in GDP, together with record unemployment, could pile pressure on states and local governments to reopen their economies.

It also deprives President Donald Trump of a success story to campaign around as he seeks re-election in November, and could ramp up criticism of the White House’s initial slow response to the pandemic. Confirmed U.S. COVID-19 infections have topped one million, according to a Johns Hopkins University tally.

Stocks on Wall Street shrugged off the GDP report and were trading higher after Gilead Sciences said its experimental antiviral drug met the main goal of a trial testing it in COVID-19 patients. The American dollar fell against a basket of currencies, while U.S. Treasury prices rose.

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The U.S. Congress has approved a fiscal package of about US$3-trillion and the Federal Reserve has cut interest rates to near zero and greatly expanded its role as banker of last resort, but economists say these measures are inadequate. Fed officials were wrapping up a two-day policy meeting on Wednesday.

DIFFICULT ROAD AHEAD

Economists also did not believe that reopening regional economies, as some states are now doing, would quickly return the broader economy to pre-pandemic levels, which they said would take years. Reopening the economy also involves the risk of a second wave of infections and further lockdowns.

Economists expect an even sharper contraction in GDP in the second quarter, with estimates for a drop as large as a 40-per-cent pace. They believe the economy entered recession in the second half of March when the social distancing measures took effect.

The National Bureau of Economic Research, the private research institute regarded as the arbiter of U.S. recessions, does not define a recession as two consecutive quarters of decline in real GDP, as is the rule of thumb in many countries. Instead, it looks for a drop in activity, spread across the economy and lasting more than a few months.

“The next few months will be extremely difficult for the U.S. economy, with a historic contraction in GDP in the second quarter,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “If consumers and workers remain housebound into the third quarter, or if the pandemic fades and then re-emerges, the recession could last throughout 2020.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, tumbled at a 7.6-per-cent rate in the first quarter, the sharpest drop since the second quarter of 1980, after growing at a 1.8-per-cent pace in the October-December period. Income at the disposal of households rose at a tepid 0.5-per-cent rate last quarter, slowing from a 1.6-per-cent pace in the fourth quarter. The saving rate surged to 9.6 per cent from 7.6 per cent.

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Imports shrunk at a 15.3-per-cent rate, the largest decline since the second quarter of 2009, leading to a narrower trade deficit, which contributed 1.30 percentage points to GDP last quarter. But that meant no inventory was accumulated, with stocks at businesses decreasing at a US$16.3-billion rate after increasing at a US$13.1-billion pace in the fourth quarter.

Business investment contracted at an 8.6-per-cent rate, the sharpest since the second quarter of 2009. That marked the fourth straight quarterly drop in investment and reflected declines in spending on equipment, particularly transportation.

Spending on non-residential structures such as mining exploration, shafts and wells also tanked. Business investment was already stressed by the Trump administration’s trade war with China, cheaper oil and problems at Boeing.

Most economists have dismissed the idea of a quick and sharp rebound, or V-shaped recovery, arguing that many small businesses will disappear. They also predicted some of the about 26.5 million people who have filed for unemployment benefits since mid-March are unlikely to find jobs.

“The legacy of the crisis and the potential for long-term structural changes mean at best we currently think the lost output in first and second quarter won’t be fully regained until late 2022,” said James Knightley, chief international economist at ING in New York.

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Trump's COVID orders too little, too late to help U.S. economy, experts say – TheChronicleHerald.ca

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By Jonnelle Marte

(Reuters) – U.S. President Donald Trump’s weekend attempt to sidestep stalled congressional negotiations over the next coronavirus aid package will do little to boost the economy, experts said.

Trump’s executive order and presidential memoranda, introduced on Saturday, would temporarily extend enhanced unemployment benefits at a reduced amount of $400 a week, defer payroll taxes for some workers, suspend federal student loan payments and potentially provide eviction relief. Even if he can overcome the legal questions surrounding his actions, the efforts may not pack much punch, economists say.

Mark Zandi, the chief economist at Moody’s Analytics, calculated the orders could provide just over $400 billion in total relief. JPMorgan Chase economist Michael Feroli wrote in an email note on Monday that the initiatives could contribute “less than $100 billion” in stimulus.

That’s versus the $1 trillion aid package proposed by the Republican-led Senate or the more than $3 trillion aid bill passed by the Democrat-led House of Representatives.

Altogether, the president’s orders would add up to 0.2% of GDP, a “negligible amount,” according to estimates from Lydia Boussour, senior U.S. economist for Oxford Economics.

Millions of jobless Americans could be financially squeezed this month after the expiration of a $600 weekly supplement to unemployment benefits, the winding down of eviction moratoriums across the country and the end of the Paycheck Protection Program, which supported small businesses.

Some of the measures proposed by Trump would take time to set up and could be challenged in court, experts said. “They’re not going to do anybody any good in the here and now,” Zandi said in an interview.

The president’s efforts may also not reach all of the workers relying on aid. For example, the $400 weekly supplement to unemployment benefits would only apply to people receiving at least $100 in state unemployment benefits and could exclude some low-income workers. The added benefits, which would be financed by $44 billion from the Disaster Relief Fund, would only last about five or six weeks, Feroli estimates.

And the program would put more pressure on states – which have already seen their budgets strained during the crisis – by requiring them to pay 25% of the $400 supplement.

A measure that would defer employees’ share of the Social Security payroll tax from September through December is not expected to have a noticeable impact on spending because it helps people who are still working, wrote Boussour. Workers would still owe the taxes later.

Trump’s policy move on housing may not lead to immediate relief for people who are falling behind on their rent or mortgage payments.

The president asked the heads of Housing and Urban Development and the U.S. Treasury to look into ways to provide assistance to renters and homeowners and to research legal actions that could help to avoid evictions and foreclosures – rather than spelling out any concrete actions.

The measure that is most likely to become reality is the extension of a freeze on federal student loan payments, Zandi said. That is set to expire Sept. 30; Trump’s measure would extend it through the end of the year.

The step could save borrowers $15 billion to $20 billion, Zandi estimates. “For the students that’s a big deal, but for the macro economy in a crisis, it’s really not meaningful.”

(Reporting by Jonnelle Marte; Additional reporting by Brad Heath; Editing by Heather Timmons and Cynthia Osterman)

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BoE to step up QE if economy slows again, deputy governor says – The Times – TheChronicleHerald.ca

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(Reuters) – The Bank of England will step up on quantitative easing (QE) if the British economy slows and struggles again, Deputy Governor Dave Ramsden said in an interview published on Tuesday, adding to his previous comments that BoE has more headroom to act.

QE would accelerate if “we saw signs of (market) dysfunction,” Ramsden told The Times newspaper in an interview https://bit.ly/2DFcMlr.

“I’m confident we’ve still got significant headroom to do more QE if we saw a much weaker recovery,” Ramsen said, adding that the central bank was prepared to do more quantitative easing, beyond the 745 billion pounds ($975.58 billion) committed.

He added that he was “confident” there would be no further quarters of negative growth for UK’s economy.

“A key outcome is what happens to the labour market. Some companies are going to go under. Some jobs are going to be lost,” Ramsen said.

Last week, Britain’s central bank said it saw no immediate case to cut interest rates below zero as it warned the economy would take longer to recover from the COVID-19 slump than it previously forecast.

Unemployment is likely to almost double by the end of this year, the Bank of England said on Thursday.

The BoE cut interest rates to just 0.1% in March and expanded its bond-buying plan to almost $1 trillion.

On Thursday, its nine monetary policymakers all voted for ‘no policy changes’ as they sketched out a slow path to recovery.

(Reporting by Kanishka Singh in Bengaluru, Editing by Sherry Jacob-Phillips)

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BoE to step up QE if economy slows again, deputy governor says – The Times – The Journal Pioneer

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(Reuters) – The Bank of England will step up on quantitative easing (QE) if the British economy slows and struggles again, Deputy Governor Dave Ramsden said in an interview published on Tuesday, adding to his previous comments that BoE has more headroom to act.

QE would accelerate if “we saw signs of (market) dysfunction,” Ramsden told The Times newspaper in an interview https://bit.ly/2DFcMlr.

“I’m confident we’ve still got significant headroom to do more QE if we saw a much weaker recovery,” Ramsen said, adding that the central bank was prepared to do more quantitative easing, beyond the 745 billion pounds ($975.58 billion) committed.

He added that he was “confident” there would be no further quarters of negative growth for UK’s economy.

“A key outcome is what happens to the labour market. Some companies are going to go under. Some jobs are going to be lost,” Ramsen said.

Last week, Britain’s central bank said it saw no immediate case to cut interest rates below zero as it warned the economy would take longer to recover from the COVID-19 slump than it previously forecast.

Unemployment is likely to almost double by the end of this year, the Bank of England said on Thursday.

The BoE cut interest rates to just 0.1% in March and expanded its bond-buying plan to almost $1 trillion.

On Thursday, its nine monetary policymakers all voted for ‘no policy changes’ as they sketched out a slow path to recovery.

(Reporting by Kanishka Singh in Bengaluru, Editing by Sherry Jacob-Phillips)

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